STRENGTHS

WEAKNESSES

Dependence on the international economy due to the scale of tourism in the national economy

Insularity

Chronic budget deficit and growing public debt

Chronic and large current account deficit

Political instability

Vulnerability to natural disasters; very high exposure to climate change; 80% of the territory at one meter or less above sea level

Excessive pollution; waste management challenges

RISK ASSESSMENT

Stable growth supported by tourism and infrastructure projects

In 2019, growth is set to remain stable. The tourism sector (over a third of GDP) will remain a major contributor to growth. In the first quarter of 2018, tourist arrivals increased by 10% compared to a year earlier, supported by the expansion of tourism infrastructures. These numbers should continue to grow throughout 2019. China remains the leading national contributor of tourists (25%), and Europe the leading regional contributor (49%). Massive infrastructure and development investments across the tourist islands will also continue to contribute significantly to growth. The expansion of the Velana International Airport will continue, and the construction of a new passenger terminal will facilitate the accommodation of more than 7 million passengers per year, compared to 1.5 million currently. The expansion is financed by Chinese, Saudi, and Emirati investments. China has committed the biggest investment by far: as part of the Maritime Silk Road (MSR) initiative, USD 830 million (20% of the Maldives’ GDP) was released for the airport expansion. China has already financed a new airport runway, and a bridge between the airport island and the capital, Malé, both inaugurated in 2018. These ongoing projects mean the construction sector will continue to spur activity, employment and domestic consumption. Although the fishing sector requires modernization, it still accounts for around 20% of employment and around 10% of GDP.

High external public debt and growing dependence on China

The country is still participating in a World Bank programme to improve the management of public sector’s finances. Public investments in infrastructure, mainly for the tourism sector but also public housing, are expected to keep the budget deficit high in 2019. In contrast, there will be a decrease from 2018 onwards thanks to growing tax revenues from import tariffs and the airport tax. A new online system for tax administration and payment should also increase revenues on a constant tax base. Public debt is increasing on the back of the ongoing infrastructure investments. The share of Chinese loans for construction investments as part of the MSR is worrisome, as it reaches 70% of total national debt, and annual repayments to China take up around 10% of the government budget.

The current account deficit will be slightly smaller in 2019 as the growth of capital expenditure imports for construction slows. Exports of goods, mainly fish and especially tuna, will continue to increase slightly. However, a lack of a manufacturing industry obliges the country to massively import goods. Tourism revenue, part of the balance of services, constitutes the main positive contribution to the current account balance. The deficit is also under the influence of commodity prices, and will notably be negatively impacted by the increase in oil prices. Even if it is in decline, the current account deficit remains large, especially given the low level of international reserves and the growing exposure to international creditors.

The current account deficit and the level of external public debt induce a risk of pressure on the rufiyaa, and, by extension, a risk from the amount of external debt denominated in foreign currencies, especially in a context of an appreciating US dollar and global monetary tightening.

Amidst an authoritarian climate, the opposition wins the presidential elections

In 2018, the country slid further towards authoritarianism under the presidency of Abdullah Yameen. In February, the President opposed the Supreme Court’s decision to free jailed opposition politicians, which led to protests and social unrest. In response, President Yameen imposed a state of emergency for 45 days. This was condemned by the international scene and considered anti-constitutional. In September 2018, the opposition candidate, Ibrahim Mohamed Solih, democratically gained office. This outcome came as a somewhat unexpected but auspicious sign for democracy, stability and transparency. Nevertheless, the business climate and security deteriorated severely during President Yameen’s term of office. Instability, corruption, authoritarianism, and Islamic radicalisation remain major sources of concern. In the 2018 World Bank Doing Business rankings, the Maldives was downgraded to the 136th rank in 2018, far from its high point of 49th place in 2006.

The Maldives is a disputed geostrategic partner thanks to its position relative to international trade sea routes in the Indian Ocean. China has anchored its influence through a free trade agreement and major infrastructure investments (over USD 1.2 billion) as part of the MSR initiative. The change of governance in 2018 has dredged up battles of influence, as the new coalition has expressed wishes of reviving historical ties with India.